Disclosure of climate related financial risks for financial sector entities

-Payal Agarwal, Senior Manager | payal@vinodkothari.com

RBI has released a Draft Disclosure framework on Climate-related Financial Risks, 2024 (“Disclosure Framework”) on 28th February, 2024 proposing to make disclosure of climate-related financial risks mandatory for RBI-regulated entities. The proposed disclosures are based on the four thematic areas or pillars – (i) Governance, (ii) Strategy, (iii) Risk Management and (iv) Metrics and Targets – as recommended by the Task Force on Climate-related Financial Disclosures (“TCFD Recommendations”).

Applicability of the Disclosure Framework

The Disclosure Framework is proposed to be made applicable to the following Regulated Entities (REs) as per the specified timelines.

Sl. No.	Type of Regulated Entity (RE)	Trigger of applicability
		Governance, Strategy and Risk Management	Metrics and Targets
	All Scheduled Commercial Banks (excluding Local Area Banks, Payments Banks and Regional Rural Banks)	FY 2025-26 onwards	FY 2027-28 onwards
	All Tier-IV Primary (Urban) Co-operative Banks (UCBs)	FY 2026-27 onwards	FY 2028-29 onwards
	All All-India Financial Institutions (viz. EXIM Bank, NABARD, NaBFID, NHB and SIDBI)	FY 2025-26 onwards	FY 2027-28 onwards
	All Top and Upper Layer Non-Banking Financial Companies (NBFCs)	FY 2025-26 onwards	FY 2027-28 onwards

For other REs, the Disclosure Framework may be adopted on a voluntary basis. Mandatory applicability of the Disclosure Framework on the same will be announced in due course.

Manner of disclosure

The disclosure under the proposed Disclosure Framework is required to be made on a standalone basis. The same shall form a part of the financial statements/ financial results of the RE on its website. The disclosures under the Disclosure Framework shall be reviewed by the board of directors of the RE or a committee thereof.

Thematic pillars of disclosure

The Disclosure Framework requires disclosure by the REs on four thematic areas, and prescribes the minimum key disclosures under the same. The key disclosures are bifurcated into two broad categories:

• Baseline disclosures: These are mandatory disclosures applicable to all REs on a mandatory basis covered under the Disclosure Framework.
• Enhanced disclosures: These are additional disclosures applicable to all REs on a mandatory basis, except UCBs.

The key disclosures under each of the thematic pillars are discussed below.

1.    Governance

It should detail the governance processes, controls and procedures used by the RE to identify, assess, manage, mitigate, monitor and oversee climate-related financial risks and opportunities.

The key disclosures broadly include information w.r.t. the governance structure for oversight of climate-related issues, roles and responsibilities, relevant skills and competencies, frequency of oversight and role of management in the overall governance process.

The enhanced disclosures include the extent of considering climate-related issues in significant decisions, the manner of overseeing setting of targets and monitoring the progress, including consideration of the same in remuneration policies etc. and mandatory/ voluntary adoption of any climate-related financial disclosures (national or international). More about the various national and international frameworks for sustainability reporting may be read at Sustainability reporting: The New Normal.

2.    Strategy

It should detail the RE’s strategy for managing climate-related financial risks and opportunities.

This includes disclosure of climate-related issues that could be reasonably expected to affect the prospects of the RE, classified into ‘short term’, ‘medium term’ and ‘long term’ horizon, including potential material impact of the same on RE. It also includes description of the current and anticipated effects of climate-related financial risks and opportunities on the business model of the RE.

The enhanced disclosures under this head include effects (and the anticipated effects) of climate-related issues on the financial position and financial performance for the financial year, over short, medium and long term, climate resilience of RE’s strategy, along with significant areas of uncertainty considered in the assessment of such climate resilience, current and anticipated changes to the business model and mitigation and adaptation efforts being taken or proposed to be taken by REs. Disclosure about the resources existing and proposed to be developed, including specific details on the progress of such development plans to identify, assess, monitor and manage the climate-related issues and climate-related transition plan, if any. 

Whether climate-related financial risks are identified, quantified and those assessed as material over relevant time horizons are incorporated into the Internal Capital and Liquidity Adequacy Assessment Processes, including their climate scenario analysis programmes, where appropriate including specific information on climate scenario analysis also requires disclosure.

3.    Risk Management

It should detail the RE’s processes to identify, assess, prioritize and monitor climate-related financial risks and opportunities, including whether and how those processes are integrated into and inform the RE’s overall risk management process.

The key disclosures include the manner of assessment of climate-related financial risks, methodologies employed to understand the impact of climate-related risk drivers on the market risk positions, liquidity risk profiles, operational and other risks. This also requires disclosure on whether credit risk management systems and processes considered material climate-related financial risks, incorporation of climate-related financial risks into the internal control framework, and monitoring of such risks. In case the climate-related financial risks are prioritized over other types of risks, the process adopted for the same is to be described.

Enhanced disclosures include information on inputs and parameters used to identify, assess, prioritise and monitor climate-related financial risks, integration of the processes in the overall risk management process, changes in the climate-related financial risks management processes as compared to the previous financial year, and details of climate scenario analysis, if used for identification of climate-related financial risks.

4.    Metrics and Targets

The disclosures on metrics and targets should detail the RE’s performance in relation to its climate-related financial risks and opportunities, including progress towards any climate-related targets it has set, and any targets it is required to meet by statute or regulation.

The key disclosures include targets set and required to be met by statute or regulation for mitigating/ adapting to climate-related financial risks, objective of the target, the metric used to set the target, period for which the target is related, interim targets, third party validation of the target, if any, GHG emissions covered by the target etc. Actual performance of the RE against the targets and trend analysis of such performance also requires disclosure.

Enhanced disclosures include absolute gross GHG emissions generated during the financial year, disaggregated into Scope 1, Scope 2 and Scope 3 emissions for each industry (as per National Industrial Classification – 2008)  by asset class (viz., loans, project finance, investments etc), gross exposure to each industry by asset class, methodology used to measure GHG emissions and calculate financed emissions etc. It also requires disclosure of the amount and percentage of assets (a) vulnerable to climate-related risks, or (b) aligned with climate-related opportunities, along with capital deployed towards climate-related risks and opportunities. Disclosure of whether and how climate-related considerations are factored into remuneration of Whole Time Directors/ Chief Executive Officers/ Material Risk Takers, and percentage of remuneration recognised in the current financial year that is linked to climate-related considerations is also included.

Actionables for the reporting REs

While this is still a draft, however, if implemented as is, the Disclosure Framework would require the REs to take necessary actions to ensure a positive reporting. Some of the actionables are as under:

1. Adoption of a climate risks related policy: The REs will be required to adopt a risk management policy w.r.t. climate-related financial risks. While the same may form part of the existing risk management policy, however, considering the extent of information which is expected to be part of this, it might seem logical to adopt a separate policy document in this regard, which may be aligned with the overall risk management policy of the RE. The climate-related risks policy should cover, at the minimum, the following:
   1. Governance structure: The responsibility of the oversight on climate related risks may be assigned to a committee or equivalent, or may be designated to a specific individual. In either case, a charter document setting out the roles and responsibilities/ terms of reference of the governing authority will be required.
   2. Strategy: The policy should set out the broad strategies that may be implemented to identify, assess, monitor and manage the climate-related issues.
   3. Methodologies that may be employed to understand the impact of climate related risks on the RE.
   4. Tools to be used for assessment and monitoring of the climate-risks and management thereof, such as climate scenario analysis.
2. Setting of metrics and targets for climate-related performance: This may include the manner in which the climate performance targets are set by the RE, including validation from external parties, manner of measurement of actual performance including GHG emissions and reporting. The RE may consider verification of the reported figures through third-party certifications.
3. Modifications to the Internal Capital and Liquidity Adequacy Assessment Processes: Climate-related issues may have an impact on the assets and liquidity of the REs, and as such, suitable modifications may be made to the existing Internal Capital and Liquidity Adequacy Assessment Processes of the REs, incorporating, consideration of such climate-related risks.
4. Modifications to the Remuneration Policy of the RE: The Remuneration Policy of REs should include climate-related considerations and performance targets in determining the remuneration of personnel responsible for the same.

Overall, the REs need to ensure that consideration of climate related issues are imbibed in the overall organisational policies of the entity.

Concluding Remarks

The Disclosure Framework is a step towards bringing the climate risk reporting requirements under mainstream compliance framework, for financial sector entities in India. Currently, the only form of mandatory disclosure requirement with respect to non-financial reporting is through Business Responsibility and Sustainability Report (BRSR), that is required to be given by top 1000 listed entities on the basis of market capitalization. Much of the REs currently proposed to be covered under the Disclosure Framework may already be covered by BRSR, or may be adopting voluntary reporting under globally recognised standards/ frameworks. Therefore, there may be overlaps between the  details as required to be disclosed by the REs under the Disclosure Framework and those as are being disclosed by the REs currently. The application of the Disclosure Framework would require the REs to re-align with the existing disclosures. Repetition of reporting may be avoided, and instead, cross-referencing may be done in case an information required to be disclosed under the Disclosure Framework is already forming part of any other section of the financial reporting or vice versa.

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